Q1 earnings season look ahead: behold the almighty dollar

The year 2017 has dawned with the US dollar index at its highest level since 2002. Expectations of higher US growth, and ongoing monetary policy differentials (ie the US Federal Reserve raising rates while almost all other major central banks loosen policy) have boosted the US dollar over the past 12 months, continuing a trend that began back in 2013.

Currency movements can have a significant bearing on company earnings, a lesson that investors relearnt in 2016. The post-Brexit depreciation in sterling prompted a remarkable rally for the FTSE 100, as investors rushed to buy shares in UK companies with large overseas earnings. The lower pound would result in favourable currency translation, boosting performance. The reverse may now begin to apply for US firms. In addition, US exports will become less competitive, hitting those firms with significant activity in overseas markets.

There are a few US firms that will not feel some effect from the stronger dollar, but we can narrow down the list to some more obvious suspects. Some of these are also significant weights in the Dow, so the impact of any miss on earnings will be amplified in the broader market. The table below provides some firms that will be worth watching (sorted by Dow weighting):

A good quarterly performance will not be entirely wiped out by the rally in the dollar, but with the Federal Reserve expected to raise rates at least twice this year (with the Federal Open Market Committee itself expecting three increases), it is at present unlikely the dollar will weaken significantly. John Connally, Nixon’s Treasury Secretary, once proclaimed the dollar was ‘[the US’] currency, but [the world’s] problem’. In 2017, a strong dollar may well be a major headache for United States Inc.